Competition watchdog barks at Big Four banks over control of current account market

18th July 2014

The competition watchdog is planning an investigation into UK that should see it challenge the ‘Big Four’ high-street banks which control the majority of the current account market.

Initial findings from the Competition and Markets Authority (CMA) report into the banking sector has found a ‘lack of effective competition’ and a sector that does not ‘meet the needs of personal consumers of small and medium-sized enterprises (SMEs)’.

The CMA is now considering an in-depth market investigation into the current account market, which has revenues of over £8 billion, and SME banking that is worth £2 billion in current accounts and loans.

Currently Britain’s largest banks, known as the ‘Big Four’ and made up of Lloyds, Barclays, HSBC and RBS, provide 77% of current accounts and 85% of business lending.

The CMA said that although it has been made easier to receive authorisation for a new bank and transfers between banks has been made easier with the switching guarantee there is still a number of ‘common concerns’.

It identified the following concerns:

Barriers to entry and expansion for newer and smaller banks remain significant

There is very little movement in the market share of the largest banks

Many customers see little difference between the largest banks in terms of the services they offer

Levels of shopping around and switching between banks remain low

Limited transparency and difficulties for customers in making comparisons between banks, particularly for overdraft charges on current accounts which are very complex

In the current account market there is a degree of cross-subsidy both from retail products and the ‘free-if-in-credit’ model operated by most banks

The CMA said it wanted to hear views on these issues and thoughts on the proposals put forward by the Big Four to remedy the problems in SME lending, such as setting up a comparison site to improve transparency and making it easier for SMEs to switch bank accounts.

Alex Chisholm, CMA chief executive, said: ‘Competitive personal and SME banking markets are essential to households and businesses throughout the county, and to the success of the UK economy.

‘However, our studies have found that despite some positive developments, significant competition concerns remain which mean that customers may not be getting consistently good service and value from their banks.’

He added that a full competition review is ‘necessary to look at this market in detail and identify appropriate measures if competition concerns are found’.

The decision to investigate will be given in the autumn and a full scale inquiry could take 18 months to complete but the banks will be watching the news closely as the outcome could mean they have to divest business to make way for new banking competition.

There has already been a slew of challenger banks entering the UK current account market or announcing their intention to, including Lloyds off-shoot TSB, Virgin Money, Tesco Bank, Metro Bank and the Post Office.

The CMA was launched in April and is made up of the Office of Fair Trading (OFT) and the Monopolies and Mergers Commission. The UK’s banking industry was already on the radar ahead of the merger of the bodies, with the OFT saying in March that there was evidence of a lack of competition in banking.

David Mann, head of money at comparison site uSwitch.com, said the CMA ‘has the clout to fix the broken banking industry once and for all’ as well as lay foundations for a better market that works ‘for, rather than against, customers’.

‘With Lloyds, RBS, Barclays and HSBC dominating 80% of the market between them, it is right to seriously question whether competition is working,’ he said. ‘Challengers such as Tesco, the Post Office and M&S have all launched current accounts in the last year but it remains to be seen whether they can be a credible threat to the dominance of the Big Four.

‘An investigation should identify what needs to be done to give consumers more choice over who to bank with. Where you keep your hard-earned cash should be a place that you trust and respect – and many banks still have a long way to go before they earn this from their customers.’